REGULATIONS ON REGULATIONS ON INVESTMENT ADVISERSINVESTMENT ADVISERS

ByByDr Charles AsembriDr Charles Asembri

OUTLINEOUTLINE WHO IS AN INVESTMENT ADVISERWHO IS AN INVESTMENT ADVISER WHY REGULATE INVESTMENT ADVISERSWHY REGULATE INVESTMENT ADVISERS WHAT DOES REGULATION ENTAILWHAT DOES REGULATION ENTAIL

WHO IS AN INVESTMENT WHO IS AN INVESTMENT ADVISERADVISER

DEFINITIONS:DEFINITIONS: VARIOUS DEFINITIONS OF AN VARIOUS DEFINITIONS OF AN

INVESTMENT ADVISERINVESTMENT ADVISER1)1) Any person who, for compensation (a Any person who, for compensation (a

flat fee or percentage of assets flat fee or percentage of assets managed), offers investment advice. managed), offers investment advice. This definition includes a person who This definition includes a person who issues written reports or analyses for issues written reports or analyses for compensation.compensation.

Definitions (cont’d)Definitions (cont’d)2) An individual or organization that 2) An individual or organization that

manages and makes day-to-day manages and makes day-to-day investment decisions regarding the investment decisions regarding the purchase or sale of securities. Also purchase or sale of securities. Also called a Portfolio Manager.called a Portfolio Manager.

3) A firm or individual who is compensated 3) A firm or individual who is compensated for providing advice to investors about for providing advice to investors about the value of securities or the advisability the value of securities or the advisability of buying and selling securities.of buying and selling securities.

Definitions (cont’d)Definitions (cont’d)4) Any person who, for compensation, 4) Any person who, for compensation,

engages in the business of advising engages in the business of advising others, either directly or through others, either directly or through publications or writings, as to the value publications or writings, as to the value of securities or as to the advisability of of securities or as to the advisability of investing in, purchasing, or selling investing in, purchasing, or selling securities, or who, for compensation and securities, or who, for compensation and as part of a regular business, issues or as part of a regular business, issues or promulgates analyses or reports promulgates analyses or reports concerning securities.concerning securities.

Definitions (cont’d)Definitions (cont’d)5) The Maldives Securities Act defines an 5) The Maldives Securities Act defines an

investment adviser as:investment adviser as: A person or persons who-A person or persons who- 1) carries on the business of advising 1) carries on the business of advising

others concerning securities; orothers concerning securities; or 2) as part of a regular business issues or 2) as part of a regular business issues or

publishes analysis or reports concerning publishes analysis or reports concerning securities; orsecurities; or

3) pursuant to a contract or arrangement 3) pursuant to a contract or arrangement with a client, undertakes on behalf of the with a client, undertakes on behalf of the client the management of a portfolio of client the management of a portfolio of securities for the purpose of investment.securities for the purpose of investment.

WHO CAN BE LICENSEDWHO CAN BE LICENSED The Maldives Securities Act provides that:The Maldives Securities Act provides that: a) No person shall act as an investment adviser a) No person shall act as an investment adviser

or hold himself out to be an investment adviser or hold himself out to be an investment adviser unless he is the holder of an investment unless he is the holder of an investment adviser’s license issued under the Act.adviser’s license issued under the Act.

b) An investment adviser’s license shall be b) An investment adviser’s license shall be granted to a company provided it is a company granted to a company provided it is a company registered under the Companies Act, or an registered under the Companies Act, or an individual provided that person is over the age individual provided that person is over the age of 18 years. of 18 years.

Licensing (cont’d)Licensing (cont’d) Generally, companies which are licensed as Generally, companies which are licensed as

investment advisers are required to obtain investment advisers are required to obtain license for the individuals or persons who license for the individuals or persons who actually provide the advice.actually provide the advice.

These individuals are licensed as These individuals are licensed as investment adviser’s representatives.investment adviser’s representatives.

Provisions of Sections 38, 60(a) and 60(c) of Provisions of Sections 38, 60(a) and 60(c) of the Securities Act will allow for the licensing the Securities Act will allow for the licensing of such investment adviser’s representatives. of such investment adviser’s representatives.

WHO IS AN INVESTMENT WHO IS AN INVESTMENT ADVISER REPRESENTATIVEADVISER REPRESENTATIVE

An investment adviser representative is defined as An investment adviser representative is defined as “a person, in the direct employment of, or acting for “a person, in the direct employment of, or acting for or by arrangement with an investment adviser, who or by arrangement with an investment adviser, who performs for the investment adviser any of the performs for the investment adviser any of the functions of an investment adviser (other than work functions of an investment adviser (other than work ordinarily performed by accountants, clerks or ordinarily performed by accountants, clerks or cashiers) whether his remuneration is by way of cashiers) whether his remuneration is by way of salary, commission or otherwise and includes a salary, commission or otherwise and includes a director or officer of a body corporate who performs director or officer of a body corporate who performs for the body corporate any of the said functions”.for the body corporate any of the said functions”.

WHY REGULATE INVESTMENT WHY REGULATE INVESTMENT ADVISERSADVISERS

As intermediaries in the securities industry, As intermediaries in the securities industry, investment advisers must meet certain investment advisers must meet certain minimum initial and ongoing requirements minimum initial and ongoing requirements in order to ensure integrity and investor in order to ensure integrity and investor confidence in the securities industry.confidence in the securities industry.

In short, their regulation is necessary in In short, their regulation is necessary in order to protect investors.order to protect investors.

The Capital Market Development Authority The Capital Market Development Authority (CMDA) is empowered by the Securities Act (CMDA) is empowered by the Securities Act to regulate these intermediaries.to regulate these intermediaries.

WHAT DOES REGULATION WHAT DOES REGULATION ENTAILENTAIL

1) LICENSING AND RENEWAL1) LICENSING AND RENEWAL

2) ONGOING SURVEILLANCE AND 2) ONGOING SURVEILLANCE AND MONITORING OF COMPLIANCEMONITORING OF COMPLIANCE

3) ENFORCEMENT3) ENFORCEMENT

WHAT DOES REGULATION WHAT DOES REGULATION ENTAILENTAIL

1) LICENSING AND RENEWAL 1) LICENSING AND RENEWAL Requirements include:Requirements include: Competency Competency

(Professional/academic)(Professional/academic) Fit and Proper criteriaFit and Proper criteria Capital adequacyCapital adequacy Payment of FeesPayment of Fees

What does regulation entail What does regulation entail (cont’d)(cont’d)

2) ONGOING SURVEILLANCE AND 2) ONGOING SURVEILLANCE AND MIONITORING OF COMPLIANCE WITH MIONITORING OF COMPLIANCE WITH RULES/REGULATIONSRULES/REGULATIONS

Areas covered:Areas covered:a)a) Conduct of BusinessConduct of Businessb)b) Capital RequirementsCapital Requirements How regulated:How regulated:a)a) Inspections (on-site, off-site)Inspections (on-site, off-site)b)b) Investigations of complaints or infractionsInvestigations of complaints or infractionsc)c) Periodic ReportingPeriodic Reporting

What does regulation entail What does regulation entail (cont’d)(cont’d)

3) ENFORCEMENT3) ENFORCEMENT Apply SanctionsApply Sanctions Penalties as provided in Penalties as provided in

Act/Regulations.Act/Regulations.

1. LICENSING1. LICENSING a)a) PARTICULARS OF APPLICANT to be provided, PARTICULARS OF APPLICANT to be provided,

including:including: Name and location of principal place of business; Name and location of principal place of business;

Range of services providedRange of services provided Bankers, auditorsBankers, auditors Shareholding structure; Particulars & Shareholding structure; Particulars &

qualifications of directors and officersqualifications of directors and officers Statement to confirm that neither the applicant Statement to confirm that neither the applicant

nor any of its directors has been declared nor any of its directors has been declared bankrupt, has been convicted on fraud charges, bankrupt, has been convicted on fraud charges, has had a previous license revoked or suspended, has had a previous license revoked or suspended, etc etc

LICENSING (CONT’D)LICENSING (CONT’D)b) CAPITAL REQUIREMENTSb) CAPITAL REQUIREMENTS An applicant is required to have and An applicant is required to have and

maintain a stipulated minimum capital.maintain a stipulated minimum capital. This is to ensure that the investment This is to ensure that the investment

adviser has the financial capacity to provide adviser has the financial capacity to provide the services.the services.

c) FEESc) FEES An applicant is required to pay some fees to An applicant is required to pay some fees to

the regulator for the processing/approval of the regulator for the processing/approval of the application.the application.

2. SURVEILLANCE AND 2. SURVEILLANCE AND MONITORING OF COMPLIANCE MONITORING OF COMPLIANCE

Regulator undertakes ongoing Regulator undertakes ongoing surveillance and monitoringsurveillance and monitoring

Areas to monitor are:Areas to monitor are:A.A. Conduct of securities businessConduct of securities businessB.B. Capital requirements Capital requirements

Conduct of securities business, Conduct of securities business, include the following:include the following:

1) Maintenance of a register of interests (i.e. a 1) Maintenance of a register of interests (i.e. a register of securities in which the investment register of securities in which the investment adviser has an interest (under Chapter VI of adviser has an interest (under Chapter VI of Securities Act.Securities Act.

2) Keeping of books and records (eg receipt and 2) Keeping of books and records (eg receipt and disbursement books, bank statements, written disbursement books, bank statements, written communication received or sent to clients communication received or sent to clients relating to advice or recommendations, powers of relating to advice or recommendations, powers of attorney and other evidence of discretionary attorney and other evidence of discretionary authority granted by any client, circulars and authority granted by any client, circulars and advertisements distributed to clients. advertisements distributed to clients.

Conduct of securities business Conduct of securities business (cont’d)(cont’d)

3) Ensuring that investment adviser 3) Ensuring that investment adviser does not engage in fraudulent acts, or does not engage in fraudulent acts, or does not engage in activity that does not engage in activity that conflicts with a client’s interest.conflicts with a client’s interest.

4) Segregation and handling of clients’ 4) Segregation and handling of clients’ accounts and assets where investment accounts and assets where investment adviser has custody or possession of adviser has custody or possession of clients’ funds or securitiesclients’ funds or securities

Conduct of securities business Conduct of securities business (cont’d)(cont’d)

5) Disclosure of information to clients 5) Disclosure of information to clients regarding services provided, fees regarding services provided, fees charged, frequency of statements to charged, frequency of statements to clients etc.clients etc.

6) Restrictions on contents of 6) Restrictions on contents of advertisements by investment advisersadvertisements by investment advisers

7) Compliance with a prescribed Code 7) Compliance with a prescribed Code of Ethicsof Ethics

B. CAPITAL/FINC’L B. CAPITAL/FINC’L REQUIREMENTSREQUIREMENTS

Maintenance of a stipulated Maintenance of a stipulated minimum capital by investment minimum capital by investment adviser.adviser.

Submission of Audited Financial Submission of Audited Financial Statements periodically. Statements periodically.

3. ENFORCEMENT3. ENFORCEMENT Enforcement of Sanctions / Enforcement of Sanctions /

Penalties for Violations of the Law as Penalties for Violations of the Law as stipulated in the Securities Act and stipulated in the Securities Act and the Regulations on Investment the Regulations on Investment Advisers Advisers

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